A Note on the Bitcoin Rally

Adamant Capital
7 min readJun 5, 2019

After moving sideways for 12 days in a range of $7,000 to $8,300, bitcoin recently broke out to the upside and briefly traded at around $9,000. If the parabolic uptrend is continued, the price could reach $11,000 this month, and go higher still in July. But will it?

In this note, we share some thoughts on what is driving this rally, on investor sentiment, and share our price outlook.

What is driving the bitcoin price?

In our previous update we suggested these medium term price drivers for the bitcoin price:

  • Accumulation by family offices and institutions
  • Significant short squeeze (many expected prolonged bear market)
  • Investors exiting embattled exchanges via Bitcoin withdrawals
  • Non-selling by bitcoin miners as profit margins recover
  • Some minor “fear of missing out” from retail investors

However it appears we underestimated one factor: capital flight from China. On May 5th, the Chinese Yuan started weakening against the US dollar, and 13 days later traded 2.5% lower — a huge move in forex terms. Remarkably, that was also the week that bitcoin broke above the resistance of $6,500. In short, there’s a significant chance that in fact it was Chinese investors who pushed bitcoin in bull market territory this year.

(source: Bitmex)

Is there historical evidence to back up this claim? In our opinion yes. Capital controls, inflation and capital flight have always proved to be significant medium-term drivers of the bitcoin price, as early as the 2013 Cyprus banking crisis. In early 2016, global macro trader Mark Hart mentioned Chinese capital flight as one of the main reasons he was long bitcoin. And indeed, when from winter 2015 to winter 2016 the yuan weakened by 10%, there was ample evidence of significant price premiums on Chinese bitcoin exchanges to validate that bitcoin was used by Chinese investors as a portfolio hedge or as a vehicle to move money out of the country. In fact, the record outflows of private capital out of China in late 2015 almost perfectly coincided with the third largest move in the Relative Unrealized P&L for bitcoin. (More on that below.)

With Chinese exchanges having been forced to cease all trading in September 2017, it’s quite hard to track down data evidencing actual capital flight into bitcoin. However, as Arthur Hayes points out, China’s bitcoin OTC desks are alive and well:

“Make no mistake, just because you don’t see Okcoin and Huobi putting up big volume numbers in China, doesn’t mean they have stopped serving the Chinese market. The OTC market is vibrant, and these venues have found politically acceptable ways to allow buyers and sellers to meet in China.

Zhao Dong, arguably the largest OTC trader in China, is one of the main people responsible for the successful $1bn Bitfinex LEO IEO. He went on the record supporting Bitfinex to the Chinese crypto community, and his clout and network helped Bitfinex win back the Chinese traders. China still matters.”

Here is some additional proof of significant Chinese interest in Bitcoin. Alex Kruger notes that the recent price surge coincided with the 4th largest spike in search interest on the Google of China, Baidu:

We won’t venture a guess as to how much weaker the yuan could get, but barring a dramatic devaluation it seems reasonable to assume that (especially in the absence of a retail mania) there must be a short-term psychological limit to the price at which Chinese investors are willing to keep buying bitcoins.

So let’s move on to an analysis of bitcoin’s valuation.

Is this too much, too soon? What does history show?

In a recent note to investors, we pointed at two previous early bull market parabolic rallies, which respectively broke down and retraced by 62% and 81%.

In our opinion those analogies are still valid. The most recent parabolic curve so far is a 59 day rally of 117%, which is still comparable with the 52 day, 247% parabolic move of late 2011, and with the 108% bull run that lasted 33 days in late 2015. (A 70% retrace down from the recent high would mean a pullback to $5,580.)

However, the challenge we face when comparing current price moves to past price moves is that bitcoin keeps maturing, which over time significantly changes price volatility. (We tried focusing on retrace percentages to mitigate for that, but those could be affected, too.)

Let’s consider another way to look at historic market moves from an investor sentiment perspective: Relative Unrealized Profits & Losses.

The above graph approximates (as explained in our valuation primer) the aggregate profits or losses by bitcoin holders, judging from the last time coins were moved on the blockchain.

What we found is remarkable: bitcoin’s current parabolic curve represents the fastest increase in unrealized profits since January 2012. In other words, in the aggregate, bitcoin investors are currently realizing profits (~selling) at record slow rates compared to the growth in bitcoin’s market cap — a possible indicator of excessive short term optimism.

There is only one parabolic rally in bitcoin’s history that looks similar to this one: the rally of summer 2012, which started at $5 in early June and peaked at $16 in mid August. Looking at our Unrealized P&L chart above, we see a tremendous move from the capitulation lows on February 17 in 2012 to a high on August 16, when the bitcoin market was trading at 61% above its last realized capitalization. In terms of sentiment: this was an 82% move in 181 days. After an initial crash to $7 (80% parabola retrace), this was followed by a 5 month consolidation phase, where bitcoin traded in a range between $10 and $13.

Looking at bitcoin’s most recent price action, we went from aggregated losses of 40% versus the realized market cap, to relative unrealized profits soaring to 47% — all in the last six months. This means that so far we’ve made an 87% move in 167 days. So from a P&L perspective, this is truly a historic rally, even exceeding the record year of 2012. Should $9,000 prove the top (which is not a given) and if then we’d see a 2012-style correction repeated, we would expect after an initial crash to see bitcoin trade in a range between $6,800 and $7,680 (27–44% retrace of the rally).

In closing, we believe the earlier mentioned 72 day parabolic curve from August to November 2015 deserves an honorary mention. This spectacular 56% upward move in Relative Unrealized P&L nearly perfectly coincided with a peak in reported private capital flight from China — possibly the same driver of price as what we’re seeing today. This rally produced a 70% retrace ($5,600 would be today’s equivalent from a $9,000 high) and a swift, two month recovery back to the parabola high.


We argued in “Bitcoin in Heavy Accumulation” that a break above $6,500 would mark the start of a new bull market. After this has come to pass, we now indeed believe that these are the early innings of a new bull market.

Though it would be an unprecedented dynamic, there is a possibility that the parabolic curve will not break for another month or longer. In that case, we’ll once more have to re-evaluate our demand analysis. In the current environment of exceedingly positive sentiment in combination with slowing down demand as prices move higher, a sustained short term continuation of the parabola seems rather unlikely.

We think that, fueled by event-driven demand from China, the price has gotten ahead of itself. When Mr. Market moves from devastating paper losses (~capitulation) to massive paper profits (~greed) in 6 months time, he is experiencing a psychological shock to the system that needs time to be processed. In our opinion, and as Peter Brandt argues, for this bull market to continue at a healthier pace we need for the FOMO to subside, which will likely happen via a violent correction. After that, we could for a few months see bitcoin trade in a range with lows that are 25% below whatever the high this parabolic curve will produce.

Best wishes,
Tuur Demeester

This is a slightly adapted version of a note shared with investors on May 31st.

Tuur Demeester and Michiel Lescrauwaet are partners at Adamant Capital, LP. The statements made in this research communication are the opinions of the authors or the source cited. You should not treat any opinion expressed by the authors as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the author’s opinion. This communication is neither an offer nor recommendation to buy any security or other investment. This research communication is for informational purposes only. It is not intended to be investment advice.